As if Square (SQ -0.46%) needed more bullish support from analysts, the financial-technology company managed to garner yet another buy rating this week from Buckingham Research analyst Chris Brendler. The analyst upgraded his 12-month price target for the stock to $105. Brendler's price target follows another bullish call on the stock this week from Nomura Instinet analyst Dan Dolev, who recently gave Square a 12-month price target of $125.
While Square stock's 15% gain this week alone means Brendler's $105 price target implies just 6% upside from where shares are trading as of Thursday, it's still a bold call considering Square trades at a pricey valuation of about 15 times sales. So, what's behind Brendler's optimism?
Square for Restaurants platform. Image source: Square.
Getting to $105
"Square shares continue to defy traditional valuation paradigms, but we see no reason why the company can't continue its unprecedented momentum," said Brendler in a note to clients (via MarketWatch) this week. Backing up his view, Brendler cited the company's growing ecosystem of higher-margin services, the company's accelerating revenue growth rate, and its business model's scalability. "[W]e firmly believe Square's recent top line acceleration is sustainable," Brendler noted.
Brendler's bullish outlook for Square's revenue growth trajectory echoes Dolev's sentiment. "But is SQ too expensive?" Dolev said in a recent note to clients. "Not when taking into account its stellar 45% expected three-year revenue [compound average growth rate]."
Square's top line really has seen some uncanny momentum recently.
|
Metric |
Q2 2018 |
Q1 2018 |
Q4 2017 |
Q3 2017 |
Q2 2017 |
Q1 2017 |
|---|---|---|---|---|---|---|
|
Total net revenue growth (YOY) |
48% |
45% |
36% |
33% |
26% |
22% |
|
Adjusted revenue growth (YOY)* |
60% |
51% |
47% |
45% |
42% |
39% |
Data source: Quarterly shareholder letters. *Adjusted revenue equals total net revenue less transaction-based costs, bitcoin costs, and the effect of deferred revenue adjustments related to purchase accounting. YOY = year over year.
Consider that Square's year-over-year adjusted revenue growth rate of 60% in its most recent quarter is significantly above the company's 42% adjusted revenue growth in the same quarter last year. The difference is just as impressive in Square's unadjusted total net revenue, which increased 48% year over year in Q2 2018 -- well over the 26% growth it reported in Q2 2017.
Is Square's valuation a concern?
Despite these analysts' optimism, investors would be wise to consider the risks of investing in a stock with such a premium valuation. Indeed, another analyst shared his concerns about Square's valuation this week. BMO Capital analyst James Fotheringham, who initiated coverage of Square stock this week with a "market perform" rating and a 12-month price target of $96, said that though he "admires" Square's recent execution, he worries about Square's "valuation sustainability."
For perspective, Square's price-to-sales ratio is far ahead of its most formidable competitor: PayPal. Its more mature peer has a price-to-sales ratio of just 7.5. But PayPal notably isn't growing nearly as fast; in the company's most recent quarter, revenue increased 23% year over year.
That said, though Square's business seems to be firing on all cylinders, investors may want to think twice before they buy shares at this level.
